Dragged into Inheritance Tax

According to the Office for Budget Responsibility, more families are paying Inheritance Tax (IHT) than at any time since it was introduced in the 80s. In the current year, just over 40,000 estates are likely to be affected but next year 45,000 are expected to be hit by this tax. Part of the reason is the substantial increase in house prices.

In the financial year 2014/15, HM Revenue & Customs (HMRC) collected £3.8 billion in revenue from the tax, which is a 23 per cent increase on the previous 12 months.

In his Summer Budget of 2015, Chancellor George Osborne announced a series of measures designed to reduce the impact of IHT. These changes are set to be phased in over the course of the next five years.

The nil rate tax band of £325,000 has been frozen until 5 April 2021, which means it has been unchanged since 6 April 2009. Whilst most married couples probably have an effective £650,000 limit, the lack of increase for 13 years is clearly bringing more people into the net.

The Government will add a ‘family home allowance’, eventually worth £175,000 per person, to the existing £325,000 tax-free allowance from 6 April 2017. This will be worth £100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. This will allow individuals to pass on assets worth up to £500,000, including a family home, without paying any IHT. For married couples and civil partners, the total is £1 million. It will also only apply in limited circumstances, effectively when a main residence is left to direct descendants.

Although the changes are set to benefit the majority of people, if assets are worth more than £2 million, the allowance will gradually taper away. The value of assets will be based upon the total estate before reliefs, therefore assets such as businesses or farm land that can attract 100 per cent relief from Inheritance Tax will be included to work out the value of the estate.

As with all reliefs, it is easy to miss out and it certainly does not help anybody without children. It is therefore important that IHT is considered early by everybody and effective planning and making a Will can help to reduce your IHT liability.

There are a number of ways to reduce IHT liability or avoid paying it altogether. However, there are conditions attached and it is important to seek expert advice on the options available. Our senior tax team working together with our independent financial advisers at Milsted Langdon Financial Services Limited offer a range of Inheritance Tax solutions which can be used individually or in combination to provide personalised strategies designed to meet clients’ IHT planning objectives and circumstances. For more information, please contact us.

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